Blog Post

Has Stock Market Favorite Netflix Hit A Wall Or Just Stalled?

For the last year-and-a-half, Netflix (NSDQ: NFLX), the streaming video phenom, has seen its stock soar as it’s gobbled up new users. The company’s share price has increased a whopping 393 percent over that period. But since Netflix announced a 60 percent price hike earlier this month — angering users in the process — the company’s shares have fallen nearly seven percent. Has high-flying Netflix finally run into reality?

One thing seems clear. Despite visions of an on-demand, streaming-only world, it’s clear that rumors of the demise of the DVD have been exaggerated, at least in the short-term. The problem is that 75 percent of new subscribers in the second quarter chose the streaming-only plan despite the ability to add DVDs for only $2 a month. Netflix wants to focus on streaming but maximize profits from DVDs as long as it can, hence the split — and the decision by CEO Reed Hastings to take what the company knew would be an unpopular step for many.

In its earnings announcement earlier this week, Netflix acknowledged that the pricing change would have a negative impact on its business in the next quarter, prompting a ten percent sell-off of the company’s stock. But Hastings and his team insist the pain will be short lived, predicting that in the fourth quarter, “domestic net additions to return to a pattern of year-over-year growth while revenue will reflect a full quarter’s impact of the pricing changes.” He also wants investors to look ahead to a fourth quarter when revenue could reach as high as $1 billion for the first time.

Wall Street analysts and investors remains wary. “We expect Netflix shares to exhibit weakness relative to the group over the next three months,” Morgan Stanley analyst Scott Devitt wrote in a note to clients, adding that “confusion around the impact to the long-term subscriber growth trajectory in the US market will linger on investor minds.”

But despite the outcry over the price hike, Netflix continues to build its long-term prospects to stick as the leader in the streaming video market. In recent weeks, Netflix has struck content deals for CBS and Showtime viewing in Canada, its test bed for global expansion, and Latin America, where it’s headed in the fall. It also locked in NBCUniversal on a domestic deal for some broadcast and cable shows, (although Saturday Night Live is sadly no longer available for next-day viewing on the service).

Despite the short-term turbulence in Netflix’s stock price, we’re talking about a company that broached $200 per share in January, so even the recent ten percent dip on the earnings announcement shouldn’t dissuade long-term investors from buying the stock.

Given wide customer dissatisfaction with the new pricing plan — at least in the short-term — Netlifx’s competitors, including Hulu Plus and Amazon (NSDQ: AMZN) Prime, have an opportunity to snap up any users who leave Netflix. The question is, will they seize it? On Tuesday, word emerged that Fox (NSDQ: NWS) Networks would institute an 8-day exclusive window for those Hulu Plus users with subscriber logins that can be authenticated. Other networks are expected to follow suit.

Netflix shares were up 1.76 percent to $271.37 in mid-day trading Wednesday. Then again, it started the week at $279.41.